Estate & Gift Tax
Bogdanski
Fall 2004

Sample Answers to Question 3

Exam No. 6451 – See .pdf file here.

Exam No. 6221 – See .pdf file here.

Exam No. 6969

No GST in this problem because we’re not dealing with skip people, just father and kids.

$500k into Holdco.

This is a completed gift to Brett. The value is $500k * 40% and might get a discount because Brett is a minority shareholder. The minority discount shouldn’t be much, because the company just owns stocks and bonds. Abe will have to pay gift tax on this amount; his gift tax credit is exhausted §2505. Abe gets an annual exclusion (§2503c) if Brett has a present interest in the gift. If Brett could take the money out at anytime, Abe gets the annual exclusion. If Brett can’t control when he gets money (seems likely in this arrangement), it is a future interest and no annual exclusion is available. No §2513 split gift (for two annual exclusions) would be available because Abe is single.

Trust 1

Irrevocable trust – income to Abe for life, remainder to Brett or Brett’s estate. This is not a gift because Brett paid FMV for his remainder interest – full and adequate consideration in money or money’s worth §2512. §2702 values a non qualified retained interest at zero when property is given to a family member. Qualified interests included fixed $ income interest or fixed %. This is not, however, a gift because Brett paid for his interest. If Brett hadn’t paid, it would be a gift valued at the full $1 million because of §2702.

Trust 2

The trust for Cheryl is a completed gift. Abe has no dominion and control to change interests or beneficiaries. The power to invade for Brett’s benefit is only exercisable with the consent of Cheryl. Because Cheryl is the income and remainder interest holder she is adverse to this power. Reg §25.2511-2e. Needing the consent of an adverse party means Abe is considered to not have that power. The gift is complete.

Abe will get a §2503c annual exclusion because Cheryl has a present income interest. No §2513 split gift $22k annual exclusion because Abe is single.

Abe’s Death in 2008

Abe gets the estate tax credit per §2010c exclusion amounts. $2 million in 2008. Should have held on a little longer.

§2032 Abe’s personal representative can elect to value his estate 6 months after date of death if this will save estate tax. This does not change what is included in the gross estate, only the timing of the valuation. If things are distributed or sold earlier than 6 months, they are valued upon distribution or sale. This 6 month late valuation applies uniformly and also determines the §1014 basis.

60% of Holdco is in Abe’s gross estate per §2033. This will be valued at 60% of Holdco’s value plus a control premium.

Trust 1:

Abe has a §2036 problem. Although the sale to Brett was for “adequate and full consideration in money or money’s worth” it is possible that §2036 would still bring the full value of Trust 1 into Abe’s gross estate because he kept for his life the right to income from the property. The value of the trust in the gross estate would be reduced by the consideration Brett provided, but this is still bad news because Trust 1 appreciated and that appreciation will be in Abe’s gross estate. I disagree with this reading of §2036 – I think that when full consideration is paid this is an exception that gets the decedent out of §2036 land.

Trust 2:

Abe retained the power to invade the corpus of Trust 2 for the benefit of Brett. He did not retain that power for his life, he retained it until Cheryl reached 35 years or died. That period did not in fact end before his death. She was only 32 and alive when Abe died. While this was a completed gift when the trust was set up, for the purposes of §2036, Abe still retained “the right, either alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property or the income therefrom.” In conjunction with ANY person includes an adverse person like Cheryl. Abe retained a §2036 string and trust 2 goes back into his gross estate. He paid gift tax on it when it was worth $3 million and now it is worth more. Per §2001 he gets credit for that lifetime gift tax paid and this is not included in the “adjusted taxable gifts” so he is only paying estate tax on the appreciation of the property since he set up the trust.

§2038 applies if Abe could - on the date of his death with anyone - alter, amend, revoke or terminate an interest. He could have terminated Cheryl’s interest and given everything to Brett for Brett’s benefit if Cheryl agreed. Again, §2038 doesn’t care if the power was only exercisable in conjunction with an adverse party. §2038 also captures trust in the gross estate. §2036 already captured it and it is not like it is in his gross estate twice. (Again, no double taxation, he will now only be taxed on the appreciation since gift tax was assessed. §2001.)

If he had trusted Cheryl to help out Brett if he needed it he wouldn’t have retained that possible power and the appreciation wouldn’t have been in his gross estate.

§2035 brings in any gift tax paid in the last three years. The most recent transfers we see are 2004, so no gift tax was paid that we know of in the last three years.

Also, we don’t know of any 2036, 37, 38,42 strings that Abe cut in the last three years of his life.